Current issues in payments (part 1)

In this first of a two or three part instalment. In them Laurent Simon and I comment on our impressions of David Birch’s Tomorrow’s Transactions Forum, which we attended thanks to Dave’s generosity.

NOTE: Although written in first person, what follows results from a combination of Laurent’s and my notes.

This was a two day event for a handful of guests to foster communication and networking. I appreciated the format.

After a brief introduction, the first day kicked off with my ever growing presentation on the origins of the cashless society (you can see it here ).

The following act was Tillman Bruett (UNCDF), who was involved in the drafting of The journey towards cash-lite (at least so say the acknowledgements).
The goal of the United Nations Capital Development Fund (UNCDF) is to bring financial services to the poor in developing countries. As such is is a founding member of the Better than Cash Alliance, which promotes the advantages of a shift to electronic payments as a way to increase financial inclusion.

Bruett’s argument is that although society as a whole would win from innovations in payments, the cost and benefits of a payment system are not evenly distributed. He then illustrated his point through a number of examples from the “base of the pyramid”:

– cost saving: 75% compared to cash for government and individuals. He mentioned the case of a teacher in Mexico who had to walk an entire day to withdraw her salary in cash: the local school was shut for 2 days a month and the teacher would loose 2 days of salary. He also gave an example of people having to iron bills in Papua New Guinea so they could be used in ATMs.

– transparency: eliminates middleman taking their cut in cash transactions. He gave the example of Afghanistan’s police where monthly payments “increased” by 30% for receivers once electronic payments closed opportunities for middlemen to substract “commissions”. He said bribes were also reduced from 3.6% to 0.3% when using electronic payments rather than money.

– new market access: creates innovation; there is also a growing realisation that low income people have complex financial lives.

There are still psychological barriers to move to electronic payments. Cash is palpable and visible while e-payments are not.
Their website gives the evolution steps for e-payment adoption: few-to-few, many-to-few, many-to-many.

In developing countries, there are also problems of infrastructure/electricity to support e-payments. Other problems are the trust/perception people have in the system, and the still-clunky interfaces. He also mentioned issues of regulation and policy as well as institutional development.

At present, “Better than Cash Alliance” seems interested in documenting “cases that work” in Brazil, Mexico and the Philippines.

Panel “Mobile Wallets”
Here perhaps the views that got most attention were those expressed by Jane Zavalishina (Yandex Money - Yandex is the biggest search engine in Russia). She stated that

– Mobile phone wallets are all about “big data” and that banks dont really have the information but that search engines have better information on consumers.

– She did not considers M-PESA as disruptive innovation. She says that M-PESA simply improved the “bus transfer”: in Kenya,
people would give cash to the bus driver to deliver the money to their family. M-PESA has taken over this business, making it
faster and cheaper (bus driver no longer takes his cut). It is not a disruptive innovation.

-She does not believe in “social payment”, i.e. payments where people talk freely about what they buy. She thinks
payments are intimate. Therefore, she has no enthusiasm for social networks or Paypal being successful in e-payments.

– She considers that NFC is a solution for a problem that doesnt exist.

– She said that although payments are a commodity business, wallets by non-banks need to take over the relationship between banks and their customers, and redefining relationships is going to be very difficult.

In Russia, however, things are different; people have no relationship with their bank. It is the employer who opens account for employees in order to transfer their salary. When moving jobs, people change their account too. She concludes that it is the reason why e-Wallet/e-payments are more adopted in her country: 80% of people are aware of e-wallets, 17% use them.

Greg Wolfond (SecureKey): Authentication is the key for wallets. To work as platforms wallets must run on all devices. PoS are changing: EMV terminals come with tablets (Intuit, iZettle, Paypal Here, etc.)

Their view is that wallers are not just about payments, they are much more than that. And that for the consumer the payments model is not fundamentally broken. As a result, WEVE is not trying to disrupt existing payment instruments but offer greater convenience through a single point of contact. They are developing a trusted mobile wallet for UK: people can use their current cards and “download” them into the wallet. He said loyalty is key on mobile (coupons/tickets) and that wallets should change the consumer experience by linking the right place, right message and right moment.

So the conversation about mobile wallets should not be about payments but about new social interaction, opening platforms, consumer empowerment and enhancing the consumer experience.

Q1) One or several wallets? Will branding affect this decision? No real answer,except that card networks are trying to establish a standard for wallets; but nobody knows what a scalable wallet looks like. However a succesful wallet should
a) Act as a container of existing relationships
b) Have trusted brands inside – which implies collaboration
c) Easy to use interface
d) A central point to set up or solve disputes

Q2) Is a wallet an app or infrastructure? It seems to be more of an infrastructure: upon entering Tesco, the tesco app
would automatically open, etc.

Q3) How to remove barriers for mobile wallets?
– allow anyone to set up their loyalty programs (PayPal already does it apparently)
– consolidate existing loyalty programs. For instance mobilising loyalty schemes that either have no apps (eg Boots) or too expensive for people to sign up or follow through.

Q4) Do retailers want wallets? Retailers want loyalty (wallets doesnt seem a value proposition for SME retailers). For the big retailer loyalty means having a full picture of the consumer and designing future offers effectively. But consumers many not want to take part of “big data” and/or being bombarded with offers.

Q5) Do people use payment media differently accounting to the loyalty/reward scheme? Some 40% of people will carry a branded card. Wallets offer the possibility of having a foot on the other 60% – through not necessarily your own app.

His company is developing biometrics technologies. There is an idea that identity will become the new money, the new payment system. .. (and this statement somehow brought memories of Justin Timberlake in In Time).

He says the use of “natural ID” will change everything (voice, face, fingerprint): and that few people really understand “biometrics”. According to him, most people associate the term with the perception that their body will be examined. But it is misguided.

So proposed a move from Device Authentication:
-what you have
-where you are

to User Authentication:
-who you are
-what you know

He stated that passwords do not work:

– old days, it took 55 days to manually crack a 4-digit PIN
– with iOS, a jailbreak takes only 2 days (estimate is 20 to 40 hours)
– now with EC2, it takes 20 sec for 6 digit PIN

He claimed that with his technology, a payment can be processed within 3 sec, compared to the 7 sec intended by current players.

Their solution is based on fingerprint technology embedded in touch screens, plus PUF to authenticate devices.

Their solution does not keep a big database of fingerprints; he says this approach would be suicidal as a single leak means identities are stolen forever (or users need surgery to change face and fingers). Rather, their solution stores data on the device (probably an SE). In case of a leak, they can re-generate a template for the user. He did not say if there is a limit on the number of templates they can generate. An industry consortium has been created for better authentication: fidoalliance.org .

Taveau’s also said that making the payment frictionless is really important (of course). But he gave an interesting number: an aditional screen (for users to pay) means a 15% drop of payments.

We also had a presentation on the MintChip Challenge (the mobile wallet sponsored by the Canadian Royal Mint).

Their aim was to generate support for a cash-like product that would just be a movement of value therefore, it had to

cost less to transact than other payment solutions

But, also, would not
-ride on established payment rails
-have no middleman,
– need a bank account
-have any personal information.

(Which again, made me think how often things are defined as “negative” or “absence of” in the discourse about the cashless society).

We also had a peak at the launch of Droplet which is a Birmingham-based mobile wallet start up whose very jazzy CEO gave us the ins and outs. His “value model” is to charge no fees to neither merchants nor customers for simple transactions (hope I got this right) but will generate income by charging higher fees than Visa/Mastercard for the management of loyalty schemes.

So for all the security in the system, they go back to the usual rails

You can top up your Droplet balance using a debit card or by Direct Debit. There’s an option in the app to do this securely. Choosing how much to top up by is just like taking money out of a cash machine – you just choose £10, £20, £30 etc., and that’s it, the funds are then on your phone to spend.

However, it was interesting to see some of the ideas floated earlier in the day coming together in Droplet, but there were many skeptical comments about its long-term viability during the coffee break.

Steff, the CEO, also claimed the first transaction over the internet took place in 1994. I would be interested if anyone has more info on this. My refrence is July 1995, when the first book was sold at Amazon.com, but happy to be corrected.

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One thought on “Current issues in payments (part 1)”

A key question in all payment systems is, “Who carries the risk of fraud?”

Electronic systems often bring more parties into the chain, not all of whom play roles which the participants can understand easily. This can be disadvantageous to participants, especially where access to dispute resolution services is difficult.

These problems should be among those which are fully addressed by competing proposals.